South Korea's growth cooled last quarter before new Covid-19 wave hit

Gross domestic product rose 0.7 per cent during the April-to-June period from the previous quarter.
Gross domestic product rose 0.7 per cent during the April-to-June period from the previous quarter.PHOTO: REUTERS

SEOUL (BLOOMBERG) - South Korea's economic growth cooled after a rapid rebound from the pandemic slump, as exports fell from the prior quarter even as consumption jumped before the country was tested by its worst wave of the coronavirus.

Gross domestic product rose 0.7 per cent during the April-to-June period from the previous quarter, the Bank of Korea (BOK) said on Tuesday (July 27), below economists' consensus for a 0.8 per cent increase. The economy still expanded 5.9 per cent from the low levels of a year earlier.

The below-consensus expansion still keeps South Korea ahead of most countries in the race to emerge from the Covid-19 slump. Unless virus outbreaks worsen, the economy should be on track to reach the 4 per cent growth the BOK expects for the year and give Governor Lee Ju-yeol the green light to push ahead with a rate hike as earlier signalled.

"Private consumption is holding up better than expected this quarter despite the virus," said economist Oh Jae-young at KB Securities in Seoul. "But if the outbreaks are not brought under control, risks to the economy could grow."

How the economy performs this quarter and next will hold the key to the timing and pace of the BOK's interest rate hike. South Korea's outlook has been clouded in recent weeks by a surge in infections to well over 1,000 cases a day, which has forced the government to enforce a semi-lockdown for half the population. A vaccine shortage is also delaying the inoculation drive.

At a briefing after the GDP report, BOK official Park Yang-su said the economy remains on track to grow in line with projections, though the outlook still depends on how the outbreak evolves. At its policy meeting earlier this month, the central bank said renewed risks from the virus are offset by resilient exports and more government spending.

The GDP outcome contrasts with trends seen in earlier quarters, with exports and investment offering little support to, or negatively affecting, the readings, while private and government spending propped up growth.

Parliament approved a 34.9 trillion won (S$41 billion) extra budget last week, which includes handouts to most households. This would add 0.17 percentage points to 2021 GDP growth, according to Citigroup estimates.

The central bank has said fiscal stimulus should buffer the economic hit from virus restrictions. It should also aid vulnerable households and businesses as the BOK plans to normalise policy in order to curb financial risks.

Governor Lee Ju-yeol has said the bank would start discussing normalisation from its next meeting in August, though the timing of a hike would hinge on the virus situation.

For South Korea to flatten the virus curve and achieve the government's goal of reaching herd immunity by November, the pace of vaccination needs to pick up significantly. About one-third of the population has had at least one dose of the vaccine so far.

The consensus for growth this year among private-sector economists is now 4.1 per cent, up from 3.4 per cent in early April.

From the previous quarter, private consumption jumped 3.5 per cent, the fastest growth since 2009. Government spending also increased 3.9 per cent, the biggest rise since 1987.

Exports adjusted for price changes declined 2 per cent, while imports grew 2.8 per cent. Investment in facilities edged up just 0.6 per cent, after a 6.1 per cent pace in the previous three months.

Construction investment contracted 2.5 per cent while manufacturing fell 1.2 per cent from the prior quarter.